Question
OnlineOnes IPO is scheduled for tomorrow. You sit down with management and figure out a price that it can sell at. You believe that OnlineOne
OnlineOnes IPO is scheduled for tomorrow. You sit down with management and figure out a price that it can sell at. You believe that OnlineOne will pay its first dividend in 8 years. At that point it will pay a dividend of 1.80, which it will then increase at 6.5% each year. You think that the appropriate discount rate (equity cost of capital) for the company is 9.5%.
a. Based on your analysis, what is the predicted price of OnlineOne today?
b. You suggest a price of 24 for OnlineOne. Given this price, what is the projected return on the first day of trading, assuming that market participants share your views and price the stock equal to the predicted price from a.?
c. What do you expect the stock price to be in seven years (one year before the first dividend payment)? In fact, OnlineOnes stock price is equal to 45. You think that the reason is that market participants have updated their expectation about the equity cost of capital. At what rate rE would this be the correct price (assuming nothing else has changed, so that the first dividend is still expected to be 1.80)?
d. You change your mind. Instead, you now think that the dividend growth rate was toooptimistic. At what level g would the price in seven years be correct assuming the original levelof k (and a first dividend payment of 1.8)?
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